What is a Surety Bond and How it Differs from Insurance – Real Estate

In the world of real estate, there are an estimated 2 million licensed agents ready and willing to help homeowners tackle the goal of purchasing a home. While most real estate professionals have certain licensing and education requirements to follow through on, some confusion exists when it comes to insurance and bonding. Both insurance and surety bonds in the real estate industry are important components meant to offer protection. But the parties involved, the requirements to have one or the other, and the cost for bonds and insurance differ greatly.

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What Is a Surety Bond?

With a surety bond for a real estate professional, there are three parties involved in the process. These players include:

  • The agent or broker, known as the principal
  • The organization, individual, or municipality (city or county) that requires the bond to be in place, known as the obligee
  • The surety agency offering the bond

The principle applies for a surety bond in the amount required by the obligee, and the surety agency then assists the real estate professional in getting the appropriate, most cost-effective bond. If a claim is made against the bond, the surety agency pays the amount to the obligee, and then the real estate agent or broker repays the claim back to the surety agency. In practice, bonds are meant to protect the obligee from bad business practices and the damages that may occur because of them.

This differs significantly from insurance, where there are only two parties involved – the insurance company and the individual or business purchasing the coverage. The customer, whether an organization, government, or individual, is not involved in the initial process of getting insurance. When an insurance claim is filed, payment is made to the insurance policyholder. Insurance, then, is meant to protect the business from financial losses due to legal issues, theft, or damage.

Required Versus Optional

For many real estate positions, a surety bond is required as part of the licensing process. Surety bonds are in place to protect customers or the state in which the real estate agent or broker works from damages that are the result of the professional’s actions, or inactions. Because of this structure, a bond is a required part of doing business, and a required cost of being a real estate agent or broker.

Insurance is not always a requirement to operate a legitimate business in real estate. It is a sound business practice, however, since it protects against unforeseen damages that could impact a professional’s financial standing. Having insurance coverage for business may be necessary to lease office space or as part of a loan agreement for business financing.

The Cost for Each

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Eric Weisbrot, Chief Marketing Officer of JW Surety Bonds, can help explain when they are the right choice for a home buyer.

One of the more confusing components of surety bonds is the pricing structure behind them. The cost of a surety bond varies greatly from one professional to the next. This is because a surety agency extends a form of credit to the bondholder, and so personal credit history is evaluated in the pricing process. Business financial records also play a role in how much a surety bond costs, as does the amount of the bond and the claims history of the real estate professional. The more positive these aspects, the lower the cost of the surety bond. The type of bond required may also dictate the cost of coverage.

Insurance pricing is different since it does not represent a form of credit to the business or individual. Instead, insurance companies evaluate the risk of the business and its practices, as well as factors such as location, the value of the business, and the type of insurance purchased. The insurance premium paid varies based on these components.

Professionals in the real estate industry need to understand the differences between insurance and surety bonds, including who’s involved, what they cover, and how much they cost. Having this knowledge helps agents and brokers make informed decisions on what they need in terms of coverage.